The Only Way Out Is Either Hyperinflation Or Defaulting to the Fed
The comments below are an edited and abridged synopsis of an article by Michael A. Gayed
Economists have a dilemma: We are borrowing from the future, and it must be paid back somehow. There are two probable outcomes, and neither is fiscally responsible. The only way the world, and the US, is going to pay back the debt burden is by going to hyperinflation or defaulting to the Fed.
The global debt-to-GDP ratio hit a record 322% in January, and US debt-to-GDP was around 107%. With an economic recession and increasing debt, these numbers are set to increase. Servicing and refinancing this debt is difficult and expensive. It’s easy for the consensus to forget that we do, eventually, have to raise interest rates. How will we fight inflation when it comes? We’re already seeing it creep up in certain sectors.
The debt service burden is increasing, thanks to a sharp contraction in corporate earnings combined with mounting job losses. Gross government issuance hit an all-time monthly record of over $2.1 trillion in March ($3.2 trillion including other sectors), an estimate of the global debt-to-GDP ratio increasing to 342% from the 322%. We could be headed for hyperinflation in order to pay off this debt.
If the Fed lets the government and corporations default, it would be frowned upon politically, but the Fed will want to raise rates. If there is high inflation, the only defense is to raise rates; but that’s hard to do when debt-to-GDP levels would throw you into a massive depression. Why not let defaults push the ultimate goal of fighting the inflation bug? The Fed is already buying corporate junk bonds, effectively putting worthless debt on its books. What if it writes it off, so that it can hike rates without affecting the debt-service ratios. America could be the next Greece.
Hold gold in your portfolio to fight the fiat currency expansion. For fixed-income investors, shortening up the duration could be the best plan. Stock-market players should continue to add to names that are earning money, and perhaps junk bonds. The ideas of hyperinflation and defaulting to the Fed are a stretch, but they are more probable now than ever before. The only other ways out are a massive hike in taxes to start paying down the debt, or GDP that grows exponentially so that remittances increase naturally. Neither of those look probable, and the latter has inflation implications.